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First Quarter GDP: No Harm, No Foul

"Bringing the measurements of critical economic activities into the twenty-first century by mining tracking data for an understanding of what American consumers were doing yesterday."

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In their third estimate of the US GDP for the first quarter of 2015, the Bureau of Economic Analysis (BEA) reported that the economy was contracting at a -0.17% annualized rate, up over a half percent from the -0.75% estimated only last month, but still down sharply (-2.39%) from the +2.22% growth rate recorded for the prior quarter. And according to the "real final sales of domestic product" (BEA's very own "bottom line" for the economy), the economy shrank at a -0.62% rate during the quarter, down -2.94% from last quarter's +2.32%.

Nearly all of the BEA's major categories of economic activity had their contributions to the headline number revised upward: exports were tweaked upward by +0.24%, fixed investment +0.16%, consumer spending on goods +0.12%, inventories +0.12%, governmental spending +0.09%, and consumer spending on services +0.08%. Only imports rained on the upward revision parade, subtracting an additional -0.23% from the headline number.

Real annualized per capita disposable income was unchanged at $38,210 per annum. Meanwhile, the household savings rate decreased slightly to 5.4%, accounting for the modest upward revisions to consumer spending.

For this revision the BEA assumed a very mild dis-inflationary annualized deflator of -0.06%. Interestingly, during the same quarter the far more responsive Billion Prices Project (BPP) recorded positive annualized inflation of +1.56%. If the BPP inflation metric was used to deflate the nominal BEA data the economy could be shown to be contracting at a more than -1.79% annualized rate.

Among the notable items in the report :

The headline contribution from consumer expenditures for goods was +0.22% (down -0.85% from the prior quarter).

The contribution to the headline from consumer services spending increased to +1.21% (while still down -0.70% from the previous quarter). Healthcare spending alone provided +0.62% to the headline number. The combined consumer contribution to the headline number was 1.43%, down -1.55% from the prior quarter.

Mildly contracting commercial private fixed investments removed -0.05% from the headline number -- down -0.77% from the fourth quarter of 2014. This drop occurred primarily in spending for commercial structures and IT equipment. Some growth was reported in transportation equipment, residential construction and intellectual property.

Inventory growth added +0.45% to the headline number (up +0.55% from the previous quarter). Once again it is important to note that this number has logically and historically been nearly zero-sum over extended time periods, and future mean reversion to the zero sum should be expected.

Governmental spending removed -0.11% from the headline (up +0.24% from the -0.35% for the previous quarter). The remaining contraction was entirely the result of decreased state and local spending on infrastructure.

Exports are suffering from the strong dollar, and are now reported to be subtracting -0.79% from the headline growth rate (down -1.38% from the previous quarter).

Imports subtracted more from the headline number (-1.10%) than previously reported, yet their negative impact was still less than during the prior quarter (-1.62%).

The "real final sales of domestic product" is now contracting at a -0.62% annualized rate. This is the BEA's "bottom line" measurement of the economy and it excludes the reported inventory growth.

And as mentioned above, real per-capita annual disposable income was unchanged in this report, and it is up $432 per year quarter-to-quarter. The reported number represents an annualized growth rate of +4.65%. But it is up only +4.18% in aggregate since the second quarter of 2008 -- an annualized +0.61% growth over the past 26 quarters.

The Numbers, As Revised As a quick reminder, the classic definition of the GDP can be summarized with the following equation :

In the new report the values for that equation (total dollars, percentage of the total GDP, and contribution to the final percentage growth number) are as follows :

GDP Components Table

The quarter-to-quarter changes in the contributions that various components make to the overall GDP can be best understood from the table below, which breaks out the component contributions in more detail and over time. In the table below we have split the "C" component into goods and services, split the "I" component into fixed investment and inventories, separated exports from imports, added a line for the BEA's "Real Final Sales of Domestic Product" and listed the quarters in columns with the most current to the left :

This revision changes the sound bite for the first quarter from "material contraction" to "essentially neutral." Unfortunately, while this report is certainly nothing to get excited about (and it is still subject to significant future revisions), an essentially "neutral" reading merely serves to justify further extensions of entrenched economic policies. In the sporting vernacular: no harm, no foul.

Furthermore, extrapolating already reported 2nd quarter 2015 data into the BEA's GDP model indicates that the BEA's initial reading for 2Q-2015 growth could plausibly to be in the +2% range -- providing yet more proof that the current policies are working brilliantly.

The sound bite switches back to "material contraction" when the pesky inventory noise is filtered out.

Although real annualized per capita disposable income has shown a nice quarter-to-quarter improvement, that improvement needs to develop into a legitimate trend. The numbers are even more stark when we disregard averages that have been lifted from the high end and instead concentrate on median households -- where income is still off roughly 5% from the 2008 peak. The current "recovery" has occurred without much in the way of median household participation -- simply because median households have very little direct access to the benevolence of central banking's stimulation tools.

This all begs the question: what are the differences between "neutral", "stagnant" and "Japanified"?

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